Personal Finance

Retirement Perspectives:

Emergency Fund Planning

It’s important to build your cash reserves to be financially prepared for the unexpected.

Key Points

  • We recommend having 3-6 months of expenses saved in an emergency fund.
  • An emergency fund should be in an account of stable investments, such as a bank savings or money market account that you can access at any time.
  • If you have cut back on saving for retirement in order to prioritize funding an emergency account, make sure you resume saving once the account is fully funded.


The primary purpose of an emergency fund is to help keep your finances and savings goals intact should you experience a financial shock. By using this earmarked account to get through a period of uncertainty, you don’t have to put additional expenses on a credit card or take money out of retirement savings.

Some examples where an emergency fund can be used include:

  • Job loss. Loss of income from a job or due to disability is already a tough period to get through emotionally, but knowing you have a cash reserve on the side may help reduce some of the anxiety. Use the money to pay everyday expenses including your mortgage payment.

  • Large, unanticipated expenses. While you can budget for routine household repairs, maintenance and regular healthcare costs, for example, there may be an unplanned financial surprise.

  • Need for flexibility. Beyond paying unexpected expenses, an emergency fund could offer some flexibility if you wanted the freedom to leave your job to try something new. While it may not rise to the level of an emergency, having a cash reserve may give you the peace of mind and assurance to make changes in your life without additional financial stress.

Set aside enough to cover 3 to 6 months of expenses.


U.S. Bureau of Labor Statistics, seasonally adjusted, July 2018


  • If you are a two-earner household, then an amount that can cover 3-6 months of expenses may be sufficient as you have another income to fall back on.

  • If you are relying on only one income in your household or your income is less predictable, for example, you rely on commissions or work on a freelance basis; you may want to consider having 6 months of expenses or more saved.

  • If you expect that a job search in your field might take longer than six months, a larger fund could be appropriate.

Why You Don’t Want to Take Money Out of Retirement Accounts.

Keeping retirement savings on track is a priority for most individuals. If you take money out of an IRA or cash out your retirement savings when changing jobs, in most cases you will pay a 10% early distribution penalty if under age 59½ in addition to taxes on the amount withdrawn.


An emergency fund should be in an account of stable investments, such as a bank savings or money market account that you can access at any time.

  • The easiest way to get started is to direct money on a regular basis from your paycheck or checking account into your emergency fund.

  • For starters, try to save $1,000-$5,000 right away. Then, understand your expenses to build your reserves up over time. Try to complete the process within 1 to 2 years.
$1,000 available for emergencies could
help cover expenses like:
Unexpected expenses that could cost
thousands of dollars:
  • Car or health insurance deductibles
  • Medical emergency especially if uninsured
  • Minor home repairs
  • Major home and auto repairs
  • Replacing a broken appliance
  • Pet emergency visit or illness
  • Unplanned travel due to family illness or death
  • Unplanned moving or relocation costs
  • Gift expenses for a wedding or baby shower


Getting an emergency fund in place may take some sacrifice. You may need to modify other savings programs and cut spending for a short period of time while building up your cash reserves.

If you have to reduce your retirement plan contribution in order to prioritize funding your emergency account, make sure you resume saving for retirement once the account is fully funded. If you can contribute enough to get any company match, if available, while simultaneously funding your emergency reserve, that would be ideal. T. Rowe Price suggests saving at least 15% of your salary (including any company contributions) for your retirement goals.

If you are struggling to save, getting on strong financial footing can help. Your employer may offer a financial wellness program to help with your finances.

Also, don’t forget to start replenishing your emergency fund after you withdraw from it.

Charts are shown for illustrative purposes only.

This material has been prepared by T. Rowe Price for general and educational purposes only. This material does not provide fiduciary recommendations concerning investments, nor is it intended to serve as the primary basis for investment decision-making. T. Rowe Price, its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this material.


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